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Hello Sir Mike,
Kindly assist with the question below
Derringdo is a broadband provider which receives government assistance to provide broadband to remote areas. Derringdo invested in a new server at a gross cost of $800,000 on 1 October 20X2. The server has an estimated life of ten years with a residual value equal to 15% of its gross cost. Derringdo uses straight-line depreciation on a time apportioned basis.
The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Derringdo has no intention of disposing of the server within the first four years. Derringdo’s accounting policy for capital-based government grants is to treat them as deferred credits and release them to income over the life of the asset to which they relate.Derringdo also sells a package which gives customers a free laptop when they sign a two-year contract for provision of broadband services. The laptop has a stand-alone price of $200 and the broadband contract is for $30 per month.
In accordance with IFRS 15 Revenue from contracts with customers, what amount will be recognised as revenue on each package in the first year?
A $439
B $281
C $461
D $158According to the revision kit, the answer is (A) however my answer is (B) as calculated below:
Price for contract
Laptop- $0
2 yrs contract – $720 (30*24)Stand alone contract
Laptop- $200. @ 22%
Contract- $728 @ 78%Actual price
Laptop – 22%*720=158
Contract- 78% @720=562At laptop delivery
Recognise revenue
DR contract asset $158
CR revenue. $158Service
DR receivable $360. (30*12)
CR contract asset $78. (158/24*12
CR revenue $281 (562/24*12While at my question sir, I’m beginning to think that, does the question means what revenue to be recognised on both packages in the first year. Which means the answer will be correct as (A) i.e. $158+$281= $439.
It seems my interpretation of question was wrong initially. Could you please confirm.
Thank you for your time on this.
This is an extract from the questions as you have typed it:
“what amount will be recognised as revenue on each package in the first year?”
And this is an extract from your post:
“does the question means what revenue to be recognised on both packages in the first year”
If I were being pedantic, I would say that the options are incorrect and that the answer should be “$158 and $281”
or the question should read better as “What is the aggregate figure to be included in revenue in respect of this contract for the first year?”
What IS important is that you arrived at the correct figures for revenue from both parts of the contract so congratulations on that
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